Weaponizing the Dollar: The Nuclear Option, Part II

In Part I of this report, we reviewed the U.S. current account problem and examined how the persistent deficit affects the economy. We also discussed how the U.S. current account deficit is tied to American hegemony and ways the deficit could be addressed.

This week, using the background established in Part I, we will introduce the Competitive Dollar for Jobs and Prosperity Act (CDJPA). Along with details of the proposed law, we will discuss the macroeconomics of the CDJPA and how it would affect the dollar’s reserve currency status. We will then examine the potential political effects of the bill, the likely retaliation from foreign nations and, as always, conclude with potential market ramifications.

The Competitive Dollar for Jobs and Prosperity Act

The Competitive Dollar for Jobs and Prosperity Act (CDJPA) is a bill introduced by Senators Hawley (R-MO) and Ballwin (D-WI). The bill is designed to address the problem of America’s persistent current account deficit. The bill contains these elements:

1. The Federal Reserve is given an additional mandate to reduce the value of the dollar to a level consistent with a balanced current account over a five-year time frame.

2. In addition to lowering interest rates to achieve its new mandate, the U.S. central bank will be given two additional tools:

a. The first tool is described as a “market access charge,” which is effectively a tariff on foreign investment. The Federal Reserve would be given discretion over its application of the level and duration of the fee. It would also have discretion on the types of foreign investment to be taxed.

b. The Federal Reserve will be granted the power to directly intervene in the foreign exchange markets to move the dollar to a desired level.

This bill is simplistic in construction but has the potential to be remarkably effective if implemented. The new mandate would probably tend to trump the current central bank mandates of full employment and low inflation. Why? Because the current account target is so explicit. The Fed’s current mandates are for stable prices and full employment, neither of which is necessarily subject to a hard number. The new mandate would be enshrined in legislation.